Forget ITV, the real story is that Ten’s owners are looking to sell

There have been reports that UK commercial channel ITV is thinking about buying a stake in Channel Ten. This is rubbish.

“UK network in talks with Ten,” blared the bottom of page 1 story in The Australian Financial Review this morning, claiming that United Kingdom commercial channel ITV was in talks with Ten about a possible stake.Well, according to ITV watchers in London, that’s a case of Ten trying to talk up itself as an attractive candidate to any dumbo out there mad enough to be thinking about investing in Australian free-to-air TV.

There are lots of reasons why ITV would not be interested.

The AFR reported (the first story from new AFR London correspondent James Chessell) that ITV executive vice president of corporate development Tom Bowman held talks in Australia in January with Ten. He is not a senior ITV executive and doesn’t feature in the list of senior execs, according to the 2013-14 annual report. The story also mentions a number of takeovers by ITV in the past year or so, but fails to appreciate that these are TV production companies in the UK and United States (where ITV is now the biggest independent TV producer). The purchases have not been TV broadcasters; in fact, ITV passed on buying Channel 5 in the UK a month or so ago because the price was too expensive.

The story failed to mention that ITV had a 15% stake in Seven West Media, which it has sold down. But ITV still has a production deal with Seven that generates programs such as Downton Abbey, plus a host of second- and third-tier programs (Lewis, Inspector Morse in the past). ITV would not give that up for the chance to buy the worst TV business in a weak TV market. ITV knows the Australian TV market very well and knows there are just three commercial players (Seven, Nine and Foxtel). Ten is a basket case.

The AFR also report failed to note that ITV chairman is Archie Norman, who knows Australia very well, having drafted the revamp plan for Coles for Wesfarmers and also slated to be a senior adviser to Wesfarmers and Coles until headhunted by the UK Conservative Party to be chairman ahead of the 2010 election (and also headhunted to be chair of ITV in 2010 as well). Norman comes to Australia regularly in his continuing role with Wesfarmers. He knows the problems at Ten and how much of bad investment it would be.

The story also fails to note that ITV management and the board do not like the Murdoch family. Under James Murdoch, BSkyB raided ITV in 2006 to stop it trying to merge with Virgin Media. James Murdoch raided a 17% stake in the network. He later sold at a loss of US$1 billion (a family trait), but it destabilised ITV. When Murdoch sold, the ITV share price collapsed as the GFC and the UK recession was happening. That almost caused the network to collapse. The Murdochs and News/21st Century Fox are personae non gratae at ITV for that reason. It was only the arrival of Norman and CEO Adam Crozier plus a couple of other good executives and board members, and some ruthless cost-cutting and strategy changes, that saved the network from its near-fatal brush with the Murdoch family.

And finally, the story made no mention of the fact that Ten is virtually in the hands of the Commonwealth Bank, which has lent the network $200 million for the next four years. That loan has no restrictions because it is guaranteed by Murdoch, James Packer and Bruce Gordon. Presumably, if someone was to make an offer for Ten, those guarantees would have to be bought out, or replaced.

The real story is that for the first time, Ten says it’s on the market, for the right price. The key paragraph in the story was:

“‘The board would look at any offer that contained a premium for shareholders,’ said a source.”

Why a premium? Well, that would allow the likes of Gina Rinehart, James Packer, Bruce Gordon and Lachlan Murdoch some semblance of “honour” to cover the fact they have trashed a solid Australian TV brand and company. So why should any knowledgeable new investors want to pay “a premium” in any deal when it would merely be helping to reward the incompetent way Ten has been run from the board down for the past three-and-a-half years? And besides, suckers in the media are hard to find anywhere these days. The Lowys (who lost hundreds of millions in Ten in the late 1980s) are chastened, Alan Bond and Christopher Skase are no long available to meet the “next fool” theory of investing in Australian media, and UK and US TV companies have always found reason to avoid wasting money in this market (but not US hedge funds with Nine Entertainment Co).

And will News Corporation or Foxtel pay “a premium” if the Murdoch family decides to bail Lachie out of this problem?

The four barons have an agreement which effectively swaps debt for equity in the event of a financial shortfall, so they don’t need the premium. This is a bit of eyewash to placate the shareholders.

Fox Broadcasting, the terrestrial US network, is flush with cash and has a lot of exclusive supply agreements with production companies in the US and UK. The USFTA would enable them to be a “silent” investor without breaching the foreign ownership regulations. The only stumbling block would be US creditors.